Case Study: Testamentary Planning for the Retired Professor

Abstract

Ken Kotter is a retired fine arts professor who desires to leave a lasting legacy for his family and charity. In this presentation case study, Professor Kotter revises his will to endow a scholarship fund at his college and create two testamentary charitable remainder annuity trusts for the benefit of his sisters and children.

The Facts:

Dr. Kenneth P. Kotter is a retired professor of fine arts who has been a widower for ten years. His current estate is valued at $2 million. In good health at age 80, Professor Kotter has lived in a retirement community for eight years. He has two children who are financially stable and two younger sisters. "When my wife was living, we purchased a second-to-die life insurance police to benefit our children," said Kotter. "The policy is in an irrevocable life insurance trust and on my death the children will each receive $1 million. That is all we had intended on giving them other than some remaining personal property," he explained. One night Professor Kotter lay in bed thinking that something was missing from his plan. He remembered an old the dream of some day creating a scholarship for a promising fine arts student. He wondered if he should give something to his two sisters, should they survive him, and maybe give a little more to his children. "My wife would surely approve of this," he thought.

The Challenge:

Professor Kotter told Matthew Martin, his attorney and long-time friend about his dream. "I would like to endow a $1 million scholarship fund for promising fine arts students who are inclined to teach," he said. "On my death I would like to give each of my two sisters a $1,000 monthly income for ten years, if they survive me," he said, "and $1,000 monthly to each of my two children for 20 years." What are my options, Matt?" he asked.

Attorney Martin commended Ken for remembering that old dream and suggested he rewrite his will to include a $1 million charitable bequest to fund the scholarship at the university where he he taught. In addition, his will would create two charitable remainder annuity trusts (CRATs). One trust would pay each sister $1,000 per month for ten years; the other would pay the professor's children about $1,000 per month for 20 years. His attorney also mentioned that because the plan wouldn't take effect until death, it could be adjusted from time to time if desired.

The Results:

At their next meeting Matt told Professor Kotter that based on this plan and his current estate size there would be no exposure to federal estate tax. He also recommended using a percentage of the estate for the charitable bequest and a percentage for each CRAT based on the current value of the estate. "For example, fifty percent of the estate can be set directed as a charitable bequest to establish the fine arts scholarship and twenty-five percent to each CRAT." He also suggested the trusts each pay 5% of their initial value each year. "These trusts must pass a test to ensure something will remain for charity. I've run the numbers and these will," said Matt. "You can also designate the trusts be used to fund the Kotter Fine Arts Scholarship." Let's go and get it done," said Kotter.

This presentation is provided courtesy of Composer Systems, LLC using Composer Interactive Presentation Systems and is provided for educational purposes only. Persons making gifts to charity should review their plans with their own professional advisors. Individuals named in this case study are fictional with any relationship to real persons coincidental.

Nice to see what can be done with a bit of creative thinking. I have a question, though. The text describing the plan states that 25% of the estate would go to each trust...which would be $500k to each. Yet the illustration shows the trusts being funded with $250k. Am I missing something here?
Dennis Howie

The problem with a set dollar amount of monthly income is that it loses value over time due to inflation. After 10 years the buying power of $1000 a month will be much less than it is today. With CRUTS and with a 5% payout, funding with sufficient assets ($500k for each), and with professional management CRUTs are likely to grow in value and provide a growing income stream. By the way, the example makes two $250 CRATS and gives $1 million to the scholarship fund - what about the other $500k of the $2 million estate?

I can make a position that a CRUT with a make-up provision is a option that should be considered. The stock market is unpredictable and money managers are not all the same. Hedge funds and company stock buybacks create unmeasurable gains and artificial values. Hence, the case for a CRUT and not a CRAT.

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